UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
As Amended February 15, 2000
----------------------------
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended December 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to _________
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Commission File Number 0-13928
U.S. GLOBAL INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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TEXAS 74-1598370
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
7900 CALLAGHAN ROAD 78229-2327
San Antonio, Texas (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(210) 308-1234
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Not Applicable
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES [X] NO [ ]
On February 10, 2000, there were 6,299,474 shares of Registrant's class A common
stock outstanding and 1,496,800 shares of Registrant's class C common stock
issued and outstanding.
U.S. GLOBAL INVESTORS, INC.
I N D E X
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999, and June 30,
1999................................................................3
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited) - Six-month Period Ended December 31, 1999 and
1998................................................................5
Consolidated Statements of Cash Flows (Unaudited) - Six-month Period
Ended December 31, 1999 and 1998....................................6
Notes to Consolidated Financial Statements (Unaudited)...................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........13
PART II. OTHER INFORMATION...................................................14
Item 6. Exhibits and Reports On Form 8-K..................................14
SIGNATURES...................................................................15
EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE..........16
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 3 of 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, JUNE 30,
1999 1999
---------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 986,870 $1,025,247
Trading securities, at fair value 1,546,117 884,837
Receivables
Mutual funds 953,288 794,562
Custodial fees 300,104 203,823
Employees 138,011 50,464
Receivable from brokers -- 19,628
Other 179,450 96,667
Prepaid expenses 393,648 384,506
Deferred tax asset 326,824 141,551
---------- ----------
TOTAL CURRENT ASSETS 4,824,312 3,601,285
---------- ----------
NET PROPERTY AND EQUIPMENT 2,311,224 2,426,592
---------- ----------
OTHER ASSETS
Restricted investments 255,000 255,000
Long-term deferred tax asset 866,030 878,091
Investment securities available-for-sale,
at fair value 460,175 370,840
Equity investment in affiliate -- 749,739
Other 46,591 46,591
---------- ----------
TOTAL OTHER ASSETS 1,627,796 2,300,261
---------- ----------
TOTAL ASSETS $8,763,332 $8,328,138
========== ==========
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 4 of 16
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LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, JUNE 30,
1999 1999
---------- ----------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable $ 267,840 $ 346,504
Accrued compensation and related costs 206,208 274,667
Current portion of notes payable 70,911 68,988
Current portion of annuity and
contractual obligation 18,000 18,000
Accrued legal fees 33,281 27,840
Other accrued expenses 548,134 424,177
---------- ----------
TOTAL CURRENT LIABILITIES 1,144,374 1,160,176
---------- ----------
Notes payable - net of current portion 1,091,437 1,126,066
Annuity and contractual obligations 125,769 129,658
---------- ----------
TOTAL NON-CURRENT LIABILITIES 1,217,206 1,255,724
---------- ----------
TOTAL LIABILITIES 2,361,580 2,415,900
---------- ----------
Commitments and contingent liabilities
SHAREHOLDERS' EQUITY
Common stock (Class A)-$.05 par value;
non-voting; authorized, 7,000,000
shares 314,974 314,974
Common stock (Class C)-$.05 par value;
voting; authorized, 1,750,000 shares 74,840 24,840
Additional paid-in-capital 10,563,772 10,586,628
Treasury stock, at cost (639,073) (648,830)
Accumulated other comprehensive loss (55,873) (74,938)
Retained earnings (3,856,888) (4,290,436)
------------ ----------
TOTAL SHAREHOLDERS' EQUITY 6,401,752 5,912,238
------------ ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 8,763,332 $8,328,138
============ ==========
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 5 of 16
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
REVENUE
Investment advisory fee $ 3,020,185 $ 2,543,528 $ 1,553,943 $ 1,295,563
Transfer agent fee 1,520,959 1,650,704 777,948 849,060
Exchange fee 20,855 72,715 3,700 36,425
Custodial fee 258,163 249,781 128,790 126,067
Investment income 36,483 12,770 95,360 95,690
Other 209,547 165,567 113,955 80,281
----------- ----------- ----------- -----------
5,066,192 4,695,065 2,673,696 2,483,086
EXPENSES
General and administrative 4,633,851 4,746,580 2,424,488 2,465,096
Depreciation and amortization 179,561 245,740 91,367 122,294
Interest-note payable and other 54,005 59,093 40,537 30,885
----------- ----------- ----------- -----------
4,867,417 5,051,413 2,556,392 2,618,275
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST, EQUITY INTEREST AND
INCOME TAXES 198,775 (356,348) 117,304 (135,189)
EQUITY IN NET GAIN (LOSS)
OF AFFILIATE 51,739 (254,292) -- (126,087)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 250,514 (610,640) 117,304 (261,276)
PROVISIONS FOR FEDERAL INCOME TAXES
Deferred Tax (Benefit) Expense (183,034) 100,276 (206,807) 117,537
----------- ----------- ----------- -----------
(183,034) 100,276 (206,807) 117,537
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 433,548 $ (710,916) $ 324,111 $ (378,813)
Other comprehensive income (loss), net
of tax:
Unrealized gains (losses) on 19,065 6,207 31,298 109,204
available-for-sale securities ----------- ----------- ----------- -----------
$ 452,613 $ (704,709) $ 355,409 $ (269,609)
COMPREHENSIVE INCOME (LOSS) =========== =========== =========== ===========
Basic and Diluted Net Income (Loss) $ 0.06 $ (0.11) $ 0.04 $ (0.06)
Per Share =========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 7,299,388 6,617,553 7,520,336 6,610,467
Diluted 7,299,388 6,618,370 7,520,336 6,624,856
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 6 of 16
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 433,548 $ (710,916)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 179,561 245,740
Gain on disposal of equipment -- (25)
Net gain on sales of securities (19,804) (1,253)
(Gain) loss on changes of interest in
affiliate -- (90,126)
Provision for deferred taxes (183,034) 100,276
Changes in assets and liabilities, impacting
cash from operations:
Restricted investments -- (12,680)
Accounts receivable (405,709) 596,505
Prepaid expenses and other 39,119 (286,758)
Trading securities (446) 54,717
Accounts payable (78,664) 49,367
Accrued expenses 60,939 (11,963)
----------- -----------
Total adjustments (408,038) 643,800
----------- -----------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES 25,510 (67,116)
----------- -----------
INVESTING ACTIVITIES:
Net purchase of furniture and equipment (64,193) (140,038)
Proceeds on sale of equipment -- 25
Purchase of available-for-sale
securities -- (97,056)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (64,193) (237,069)
----------- -----------
FINANCING ACTIVITIES:
Payments on annuity (3,889) (3,586)
Payments on note payable to bank (32,706) (30,020)
Issuance of Class C shares 27,144 --
Treasury stock reissued 23,620 28,725
Purchase of treasury stock (13,863) (223,253)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 306 (228,134)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS (38,377) (532,319)
BEGINNING CASH AND CASH EQUIVALENTS 1,025,247 1,391,867
----------- -----------
ENDING CASH AND CASH EQUIVALENTS $ 986,870 $ 859,548
=========== ===========
SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Receipt of trading securities in
liquidation of equity investment $ 701,748 --
The accompanying notes are an integral part of this statement.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 7 of 16
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. U.S. Global
Investors, Inc. (the Company or U.S. Global) has consistently followed the
accounting policies set forth in the Notes to the Consolidated Financial
Statements in the Company's Form 10-K for the year ended June 30, 1999.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, United Shareholder Services, Inc. (USSI),
Security Trust & Financial Company (STFC), A&B Mailers, Inc. (A&B), U.S. Global
Investors (Guernsey) Limited (USGG), U.S. Global Brokerage, Inc. (USGB), and
U.S. Global Administrators, Inc. (USGA). On August 11, 1999, the Board of
Directors of the U.S. Global Strategies Fund (the Guernsey Fund) voted to impose
the compulsory redemption provision in the Guernsey Fund's prospectus to close
the fund and redeem all outstanding shares. The Company received its
proportionate share of the liquidation proceeds in securities during the second
quarter of fiscal year 2000.
All significant inter-company balances and transactions have been eliminated in
consolidation. Certain amounts have been reclassified for comparative purposes.
The results of operations for the six-month period ended December 31, 1999, are
not necessarily indicative of the results to be expected for the entire year.
NOTE 2. SECURITY INVESTMENTS
The Company accounts for its investment securities in accordance with SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities. Accordingly,
the cost of investments classified as trading at December 31, 1999, and June 30,
1999, was $1,882,766 and $1,197,233, respectively. The market value of
investments classified as trading at December 31, 1999, and June 30, 1999, was
$1,546,117 and $884,837, respectively. The net change in unrealized holding
losses on trading securities held at December 31, 1999, and 1998, which has been
included in income for the six-month period is $(24,217) and $(53,796),
respectively.
The cost of investments in securities classified as available-for-sale, which
may not be readily marketable at December 31, 1999, and June 30, 1999, was
$544,831 and $484,382, respectively. These investments are reflected as
non-current assets on the consolidated balance sheet at their fair value at
December 31, 1999, and June 30, 1999, of $460,175 and $370,840, respectively,
with $55,873 and $74,938, respectively, net of tax, in unrealized losses being
recorded as a separate component of shareholders' equity. These investments are
primarily in private placements, which are restricted for sale as of December
31, 1999. During the first six months of fiscal year 2000 and 1999, the Company
recorded unrealized gains of $0 and $41,450, respectively, on securities
transferred from available-for-sale securities to trading securities.
NOTE 3. INVESTMENT MANAGEMENT, TRANSFER AGENT AND OTHER FEES
The Company serves as investment adviser to U.S. Global Investors Funds (USGIF)
and U.S. Global Accolade Funds (USGAF) and receives a fee based on a specified
percentage of net assets under management. The Company also serves as transfer
agent to USGIF and USGAF and receives a fee based on the number of shareholder
accounts. Additionally, the Company provides in-house legal services to USGIF
and USGAF, and the Company also receives certain miscellaneous fees directly
from USGIF and USGAF shareholders. Fees for providing services to USGIF and
USGAF continue to be the Company's primary revenue source.
U.S. Global receives additional revenue from several sources including custodian
and administrative fee revenues, revenues from miscellaneous transfer agency
activities including lockbox functions, mailroom operations from A&B, as well as
gains on marketable securities transactions. Receivables from mutual funds
represent amounts due the Company and its wholly owned subsidiaries for
investment advisory fees, transfer agent fees, and exchange fees and are net of
amounts payable to the mutual funds.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 8 of 16
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U.S. Global has voluntarily waived or reduced its advisory fee, has guaranteed
that fund expenses will not exceed certain limits, and/or has agreed to pay
expenses on several USGIF and USGAF funds for purposes of enhancing their
performance. The aggregate amount of fees waived and expenses borne by the
Company for the six-month period ended December 31, 1999, and 1998, was
$1,081,265 and $1,620,778, respectively. Investment advisory fees are recorded
net of the above waivers.
The investment advisory and related contracts between the Company and USGIF and
USGAF will expire on February 29, 2000, and on March 8, 2000, respectively.
Management anticipates the board of trustees of both USGIF and USGAF will renew
the contracts.
NOTE 4. NOTE PAYABLE
The Company has a note payable to a bank which is secured by land, an office
building and related improvements. As of December 31, 1999, the balance on the
note was $1,144,799. The loan is currently amortizing over a twenty-year period
with payments of both principal and interest due monthly based on a fixed rate
of 7.75 percent. The current monthly payment is $11,750, and matures July 2001.
Under this agreement, the Company must maintain certain financial covenants. Due
primarily to noncash charges recorded in prior year as a result of its equity
investment in the Guernsey Fund, the Company is not meeting one of its debt
covenants; however, the Company obtained a waiver of the covenant from the bank
through December 31, 1999. The Company anticipates the bank will revise the
present terms of the note payable to restructure the debt covenants to maintain
compliance in the future. If the debt covenants are not revised, the Company
believes it has the ability to refinance the debt with another financial
institution. Additionally, the Company believes it has adequate cash, cash
equivalents, and equity in the underlying asset to retire the obligation if
necessary.
NOTE 5. INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at December 31, 1999, the Company has net operating losses
(NOLs) of approximately $2.4 million, which will expire in fiscal 2007 and 2010,
charitable contribution carry-overs of approximately $400,000 expiring between
1999 and 2001, and alternative minimum tax credits of $115,228 with indefinite
expirations. Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized under Section 382 of the
Internal Revenue Code. If certain changes in the Company's ownership occur
subsequent to December 31, 1999, there could be an annual limitation on the
amount of NOLs that could be utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management has reduced
the valuation allowance due to pro forma earnings indicating it is more likely
than not that a portion of the NOL balance will be utilized in the current
fiscal year. As such, management continues to include a valuation allowance of
approximately $600,000 at December 31, 1999, providing for the utilization of
NOLs, charitable contributions, and investment tax credits against future
taxable income.
NOTE 6. COMPREHENSIVE INCOME
Effective December 31, 1998, the Company adopted Statement No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130 established standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements. This
statement required that all items that are recognized under accounting standards
as components of comprehensive income be reported in a statement of financial
performance. The Company has disclosed the components of comprehensive income in
the consolidated statements of operations and comprehensive income and has
reclassified prior periods to conform with the new requirements. Additionally,
SFAS 130 requires disclosure of any reclassification adjustments.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 9 of 16
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SIX MONTHS ENDED
DECEMBER 31,
--------------------
1999 1998
------- --------
Unrealized gain (loss) on available-for-sale
securities $19,065 $ (6,293)
Less: reclassification adjustment for (gain)
loss included in net income -- 12,500
------- --------
Net unrealized gain (loss) on available-for-
sale securities, net of tax $19,065 $ 6,207
======= ========
NOTE 7. FINANCIAL INFORMATION BY BUSINESS SEGMENT
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in fiscal year 1999. SFAS 131 requires companies to present
segment information using the management approach. The management approach is
based on the way that management organizes the segments within a Company for
making operating decisions and assessing performance. The Company's principal
operations are located in San Antonio, Texas. The Company operates principally
in two business segments: providing mutual fund investment management services
to its clients, and investing for its own account in an effort to add growth and
value to its cash position. The following schedule details total revenues and
income (loss) by business segment:
INVESTMENT
MANAGEMENT CORPORATE
SERVICES INVESTMENT CONSOLIDATED
----------- ----------- -----------
SIX MONTHS ENDED DECEMBER 31, 1999:
Net revenues $ 5,070,605 $ (4,413) $ 5,066,192
=========== =========== ===========
Income (loss) before income taxes
and equity interest $ 203,188 $ (4,413) $ 198,775
Equity in net income of affiliate -- 51,739 51,739
----------- ----------- -----------
Net income (loss) before income
taxes $ 203,188 $ 47,326 $ 250,514
=========== =========== ===========
Depreciation and amortization $ 179,561 $ -- $ 179,561
=========== =========== ===========
Interest expense $ 54,005 $ -- $ 54,005
=========== =========== ===========
Capital expenditures $ 64,193 $ -- $ 64,193
=========== =========== ===========
Gross identifiable assets at
December 31, 1999 $ 5,564,186 $ 1,950,419 $ 7,514,605
Deferred tax asset 1,192,854
Accumulated other compre-
hensive loss 55,873
-----------
Consolidated total assets at
December 31, 1999 $ 8,763,332
===========
SIX MONTHS ENDED DECEMBER 31, 1998:
Net revenues $ 4,747,608 $ (52,543) $ 4,695,065
=========== =========== ===========
Income (loss) before income
taxes and equity interest $ (303,805) $ (52,543) $ (356,348)
Equity in net loss of affiliate -- (254,292) (254,292)
----------- ----------- -----------
Net income (loss) before
income taxes $ (303,805) $ (306,835) $ (610,640)
=========== =========== ===========
Depreciation and amortization $ 245,740 $ -- $ 245,740
=========== =========== ===========
Interest expense $ 59,093 $ -- $ 59,093
=========== =========== ===========
Capital expenditures $ 140,038 $ -- $ 140,038
=========== =========== ===========
Gross identifiable assets at
December 31, 1998 $ 5,710,043 $ 2,534,027 $ 8,244,070
Deferred tax asset 1,099,911
Accumulated other
comprehensive loss 69,537
-----------
Consolidated total assets at
December 31, 1998 $ 9,413,518
===========
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 10 of 16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
U.S. Global Investors, Inc. (the Company or U.S. Global) posted net income of
$433,548 ($0.06 income per share) for the six months ended December 31, 1999,
compared to a net loss of $710,916 ($0.11 loss per share) for the six months
ended December 31, 1998. Revenues increased by approximately $420,000 due to an
increase in net advisory fees of nearly $480,000. Additionally, there was a
reduction in total expenses of approximately $184,000. An equity interest in the
net losses of the Guernsey Fund of about $254,000 for the six months ended
December 31, 1998 had reversed into an approximate gain of $52,000 at the time
of the Guernsey Fund's liquidation in September 1999.
ASSETS UNDER MANAGEMENT
The primary source of the Company's revenue is advisory fees that are dependent
on average net assets of the mutual funds managed by the Company. Fluctuations
in the markets and investor sentiment directly impact the funds' asset levels,
therefore, affecting income and results of operations. As of January 31, 2000,
total assets under management for U.S. Global Investors Funds (USGIF) and U.S.
Global Accolade Funds (USGAF) were approximately $1.14 billion and $276 million,
respectively.
Assets under management for USGIF for the six months ended December 31, 1999,
averaged $1.20 billion versus $1.26 billion for the six months ended December
31, 1998. This decrease in average assets is primarily a result of a decrease in
the value of gold-related assets, partially offset by increases in equity and
emerging market assets. Assets under management for USGAF averaged $167 million
for the six months ended December 31, 1999, versus almost $125 million for the
six months ended December 31, 1998. This increase in average assets is primarily
attributable to increases in the Bonnel Growth Fund.
REVENUES
Total consolidated revenues increased approximately $370,000, or eight percent.
The net advisory fees increased nearly $480,000, or 19 percent. This was largely
due to a reduction in fund-related fee waivers of approximately $497,000. Gross
advisory fees remained relatively constant as continued declines in gold-related
assets were offset by increases in equity and emerging market assets.
Earnings before interest and investment income (expense), taxes, depreciation,
and amortization (EBITDA) for the six-month period ended December 31, 1999,
increased approximately $460,000. EBITDA for the six-month period ended December
31, 1999, approximated $396,000 ($0.05 per share) compared to a loss of
approximately $64,000 ($0.01 per share) for the same period ended December 31,
1998. This increase was due the increase in net advisory fees mentioned above in
addition to a decrease in operating expenses of $113,000, or 2 percent.
EXPENSES
Total consolidated expenses for the six months ended December 31, 1999,
decreased almost $184,000, or 4 percent. As noted above, this is attributable to
a decrease in general and administrative expenses of the Company of almost
$113,000, or 2 percent, for the six months ended December 31, 1999. More
specifically, the major decreases in general and administrative expenses
included decreases in salary expenses and travel expenses offset by increases in
training costs.
BUSINESS SEGMENTS
The Company operates principally in two business segments: providing mutual fund
investment management services to its clients and investing for its own account
in an effort to add growth and value to its cash position. The Company's
principal operations are located in San Antonio, Texas.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 11 of 16
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INVESTMENT MANAGEMENT SERVICES. The Company serves as investment adviser to U.S.
Global Investors Funds (USGIF) and U.S. Global Accolade Funds (USGAF) and
receives a fee based on a specified percentage of net assets under management.
See Note 3 for a detailed discussion of these services.
CORPORATE INVESTMENT. Management believes it can more effectively manage the
Company's cash position by broadening the types of investments utilized in cash
management and continues to believe that such activities are in the best
interest of the Company. These activities are reviewed and monitored by Company
compliance personnel and various reports are provided to investment advisory
clients. On December 31, 1999, the Company held approximately $2.0 million in
investment securities. The value of these investments is approximately 23
percent of total assets and 31 percent of shareholders' equity at period end. Of
the $2.0 million in investment securities, the Company classified approximately
$1,540,000 as trading securities and approximately $460,000 as
available-for-sale securities. Available- for-sale securities are primarily
private placements. During the six months ended December 31, 1999, there were
realized gains of $19,804 from the sale of investments, compared with gains of
$1,253 for the six months ended December 31, 1998. The net change in the
unrealized holding gains (losses) on trading securities held at December 31,
1999 and 1998, which has been included in earnings for the six-month period, was
$(24,217) and $(53,796), respectively.
On August 11, 1999, the Board of Directors of the U.S. Global Strategies Fund
(the Guernsey Fund) voted to close the fund and redeem all outstanding shares.
The Company received its proportionate share of the liquidation proceeds in
securities during the second quarter of fiscal year 2000.
The table below summarizes operating income and net income by each segment.
SIX MONTHS ENDED
DECEMBER 31,
----------------------
1999 1998
--------- ---------
Investment management services $ 203,188 $(303,805)
Corporate investment activity (4,413) (52,543)
--------- ---------
Income (loss) before income taxes and equity interest $ 198,775 $(356,348)
Net income (loss) $ 433,548 $(710,916)
INCOME TAXES
Provisions for income taxes include deferred taxes for temporary differences in
the bases of assets and liabilities for financial and tax purposes, resulting
from the use of the liability method of accounting for income taxes. For federal
income tax purposes at December 31, 1999, the Company has net operating losses
(NOLs) of approximately $2.4 million, which will expire in fiscal 2007 and 2010,
charitable contribution carry-overs of approximately $400,000 expiring between
1999 and 2001, and alternative minimum tax credits of $115,228 with indefinite
expirations. Certain changes in the Company's ownership may result in a
limitation on the amount of NOLs that could be utilized under Section 382 of the
Internal Revenue Code. If certain changes in the Company's ownership occur,
there could be an annual limitation on the amount of NOLs that could be
utilized.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax amount will not be realized. Management has reduced
the valuation allowance due to pro forma earnings indicating it is more likely
than not that a portion of the NOL balance will be utilized in the current
fiscal year. As such, management has continued to include a valuation allowance
of approximately $600,000 at December 31, 1999, providing for the utilization of
NOLs, charitable contributions, and investment tax credits against future
taxable income.
FEE WAIVERS AND FUND REIMBURSEMENTS
The Company has agreed to waive a portion of its fee revenues and/or to pay for
expenses of certain mutual funds for purposes of enhancing the funds'
competitive market position. Should assets of these funds increase, fund
expenses borne by the Company may increase. The Company expects to continue to
waive fees and/or pay for fund expenses as
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 12 of 16
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long as market and economic conditions warrant. However, subject to the
Company's commitment to certain funds with respect to fee waivers and expense
limitations, the Company may reduce the amount of fund expenses it is bearing.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had net working capital (current assets minus
current liabilities) of approximately $3.7 million and a current ratio of 4.2 to
1. With approximately $987,000 in cash and cash equivalents and approximately
$1.5 million in marketable securities, the Company has adequate liquidity to
meet its current debt obligations. Total shareholders' equity was approximately
$6.4 million and cash, cash equivalents, and marketable securities comprise 29
percent of total assets. With the exception of operating expenses, the Company's
only material commitment is the mortgage on its corporate headquarters, a
long-term debt. The Company's cash flow is expected to be sufficient to cover
current expenses, including debt service.
The Company's major source of cash flow, the investment advisory and related
contracts between the Company and USGIF and USGAF, will expire on February 29,
2000, and March 8, 2000, respectively. Management anticipates the board of
trustees of both USGIF and USGAF will renew the contracts.
Management believes current cash reserves, financing obtained and/or available,
and cash flow from operations will be sufficient to meet foreseeable cash needs
or capital necessary for the above mentioned activities and allow the Company to
take advantage of investment opportunities whenever available.
YEAR 2000 DISCLOSURE
SUMMARY
The Company was successful in actively addressing the potential impact of the
Year 2000 (Y2K) problems by established a proactive approach to ensure that the
Company's critical systems operated before, during, and after the century date
rollover.
The Company had taken steps to increase the awareness of its employees and
associated persons with respect to the Y2K problems and what actions would be
taken to address such problems. The Company formed a Y2K team, which included
senior management and experienced analysts and programmers, which met on a
regular basis to carry out and monitor the Company's Y2K project. The cost of
the Company's Y2K project totaled approximately $150,000. The Company expects
this cost to be a one-time event which will not be reflected in future periods.
The Company identified all of its mission-critical systems and completed an
inventory of all hardware, software, networks, and other various processing
platforms, and also customer and vendor interdependencies. The Company completed
an assessment of the systems inventoried to determine their susceptibility to
Y2K issues. This assessment included inquiries to service providers, vendors,
and manufacturers of all systems inventoried to determine and document if such
systems are Y2K compliant. All of the Company's mission critical service
providers, vendors and manufactures responded that they were Y2K ready. The
Company also completed the testing of its mission-critical systems and made the
necessary upgrades to ensure that all mission-critical systems and software were
Y2K compliant.
The Company designed its contingency plan to mitigate the risks to its
operations or its core business resulting from any failure to successfully
complete its Y2K project. The Company updated its contingency plan to include
alternatives that could have been used in case there had been any business
interruptions.
FORWARD-LOOKING INFORMATION
The Company has made forward-looking statements concerning the Company's
performance, financial condition, and operations in this quarterly report. The
Company from time to time may also make forward-looking statements in its public
filings and press releases. Such forward-looking statements are subject to
various known and unknown risks and uncertainties and do not guarantee future
performance. Actual results could differ materially from those anticipated in
such forward-looking statements due to a number of factors, some of which are
beyond the Company's control,
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 13 of 16
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including (i) the volatile and competitive nature of the investment management
industry, (ii) changes in domestic and foreign economic conditions, (iii) the
effect of government regulation on the Company's business, (iv) market, credit,
and liquidity risks associated with the Company's investment management
activities, and (v) failure of the Company's vendors or other third parties to
achieve Y2K compliance. Due to such risks, uncertainties, and other factors, the
Company cautions each person receiving such forward looking information not to
place undue reliance on such statements. All such forward looking statements are
current only as of the date on which such statements were made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's balance sheet includes assets whose fair value is subject to
market risks. At December 31, 1999, the Company held approximately $2.0 million
in securities (trading and available-for-sale categories) other than USGIF money
market mutual fund shares.
Due to the Company's investments in equity securities, equity price fluctuations
represent a market risk factor affecting the Company's consolidated financial
position. The carrying values of investments subject to equity price risks are
based on quoted market prices or if not actively traded based on management's
estimate of fair value as of the balance sheet date. Market prices fluctuate,
and the amount realized in the subsequent sale of an investment may differ
significantly from the reported market value. The Company's investment
activities are reviewed and monitored by Company compliance personnel and
various reports are provided to investment advisory clients.
The table below summarizes the Company's equity price risks at December 31,
1999, and shows the effects of a hypothetical 25 percent increase and a 25
percent decrease in market prices. A comparison of quarter-end stock prices on
the individual stocks within the Company's equity portfolios over the three
years ending June 30, 1999, indicated that the change from one quarter to the
next was 25 percent or less approximately 90 percent of the time.
ESTIMATED
FAIR VALUE INCREASE
FAIR VALUE AFTER (DECREASE)
AT HYPOTHETICAL HYPOTHETICAL IN
DECEMBER 31, PERCENTAGE PERCENT SHAREHOLDERS'
1999 CHANGE CHANGE EQUITY
----------- ------------ ------------ ------------
Trading Securities $ 1,546,117 25% increase $ 1,931,646 $ 255,109
25% decrease $ 1,159,588 $(255,109)
Available-for-Sale $ 460,175 25% increase $ 575,219 $ 75,929
25% decrease $ 345,131 $ (75,929)
The selected hypothetical change does not reflect what could be considered best-
or worst-case scenarios. Results could be significantly worse due to both the
nature of equity markets and the concentration of the Company's investment
portfolio.
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 14 of 16
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits
11 Statement re: Computation of Per Share Income
27 Financial Data Schedule
2. Reports on Form 8-K
None
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 15 of 16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
U.S. GLOBAL INVESTORS, INC.
DATED: February 15, 2000 BY: /S/ FRANK E. HOLMES
---------------------
Frank E. Holmes
Chief Executive Officer
DATED: February 15, 2000 BY: /S/ DAVID J. CLARK
-------------------
David J. Clark
Chief Financial Officer
Chief Operating Officer
DATED: February 15, 2000 BY: /S/ TRACY C. PETERSON
---------------------
Tracy C. Peterson
Chief Accounting Officer
U.S. Global Investors, Inc.
December 31, 1999, Quarterly Report on Form 10-Q Page 16 of 16
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EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
SIX MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
1999 1998 1999 1998
---------- ----------- ---------- -----------
Net income (loss) $ 433,548 $ (710,916) $ 324,111 $ (378,813)
========== =========== ========== ===========
BASIC
Weighted average number shares
outstanding during the period 7,299,388 6,617,553 7,520,336 6,610,467
Basic income (loss) per share $ 0.06 $ (0.11) $ 0.04 $ (0.06)
========== =========== ========== ===========
DILUTED
Weighted average number of shares
outstanding during the period 7,299,388 6,617,553 7,520,336 6,610,467
Effect of dilutive securities:
Common stock equivalent shares
(determined using the "treasury
stock" method) representing
shares issuable upon exercise
of preferred or common stock
options -- 817 -- 14,389
---------- ----------- ---------- -----------
Weighted average number of shares
used in calculation of diluted
income per share 7,299,388 6,618,370 7,520,336 6,624,856
========== =========== ========== ===========
Diluted income (loss) per share $ 0.06 $ (0.11) $ 0.04 $ (0.06)
========== =========== ========== ===========